Tuesday, November 22, 2016

The Austrian School of Economics is Being Used as Cannon Fodder in an Attempt to Gain Trump's Mind in the Battle at the Fed

Jeff Deist has a very important essay out at Mises.org, Austrians at the Fed?

In it, he discusses a recent Bloomberg column that warns that Austrian school economists might take over the Fed under a Donald Trump presidency.

Deist is correct to note that this is very unlikely. He writes:
[T]here is no indication whatsoever that Donald Trump employs or intends to employ economists who are sympathetic to the Austrian school.
The closest economist to an Austrian that might gain a Federal Reserve position is Judy Shelton. She is now part of Trump's economic "landing team" and is sympathetic to a gold standard but as Deist correctly reports:
Even the appointment of Dr. Judy Shelton to his economic advisory team, which raised eyebrows simply because she advocates some level of gold backing for the US dollar, hardly portends a hard-money Fed. Dr. Shelton may be a breath of fresh air relative to the Greg Mankiws and Glenn Hubbards, but she is also a "King Dollar" Larry Kudlow type who thinks an "international monetary system" should stabilize currency exchange rates. She is hardly an Austrian. 
So where is this idea that Austrians are suddenly going to gain control of the Federal Reserve?

The answer becomes clear when understand that Trump once he becomes President will be nominating individuals for two current vacant positions on the Federal Reserve Board of Governors and that Chair Janet Yellen and Vice-Chair Stanley Fischer’s terms will expire in 2018.

And when we look at the author of the Bloomberg column, Tim Duy.

I wrote in the September 12, 2016 edition of the EPJ Daily Alert:
[W]hen I read any news  reports, I look at who wrote the piece, who is quoted. etc. And sometimes it goes beyond journalists. As I have pointed out, you can get a very good idea of Janet Yellen's thinking by paying attention to the comments of San Francisco Fed President John Williams, who worked directly under Yellen when she was the SF Fed prez. It wasn't a coincidence that he started talking up increasing the Fed inflation target just a week before Yellen brought up the subject during her Jackson Hole speech....

[Which brings me to Tim Duy]

Duy worked with [Fed member Lael] Brainard earlier in his career when he was in Washington D.C.

His talk of her being a major new influence at the Fed was just him promoting her at a time the real Fed players, the troika of Yellen-Fischer-Dudley, backed away from a rate hike last year. But they didn't do it because they were influenced by her dovish views. They did it because  they were spooked by the negative markets at the time---and they raised rates at the following meeting.

Brainard has no significant influence as a Fed member, she needs to be watched because if she is on board for a rate hike, you know a rate hike is coming for sure, but she is not going to dissuade the troika from raising rates.
What does this have to do with Duy's recent column and the vacant Fed positions? There is a battle going on at the Fed to capture Trump's attention. Brainard is the most inflationist, pro money printing member of the Fed. Duy's column is the first step in an attempt to dissuade Trump from putting any even slightly conservative members on the Fed. Brainard wants loose money allies. Duy wants to help her in that cause.

By Duy painting a picture that there are Austrian economists out there who could be named to the Fed, and distorting the Austrian view, he is trying to spook Trump, or those advisers around Trump who read, to lean toward loose money types that would help Brainard gain strength in numbers in the direction of a looser money printing policy. It might work. Trump has spouted some anti-Fed rhetoric but it is not because he appreciates the dangers of central bank manipulations of interest rates and the money supply. He has simply viewed the Fed as a political organization that has worked against him by keeping rates low during the election campaign when he was running against Hillary Clinton.

Now that he has won the election, he may very well revert back to his earlier view that he likes interest rates low unless there is strong price inflation.


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